April 2014 Archives

April 10, 2014 2:19 PM

Comcast Wins When "Net Neutrality" Issues Take Center Stage

I guess everyone that watched yesterday's Senate Judiciary Committee hearing on the Comcast-Time Warner Cable merger had a different opinion on it.  I had prepped myself by reading all of those "Comcast owns Washington" and "David Cohen is The Man" articles, but I really wasn't prepared . . . for the awful truth.  See and believe (whole hearing here).


Maybe I'm reading this all wrong, but it looked like the Committee Chairman, Sen. Patrick Leahy (D-VT) pretty much indicated that he's cool with the deal--just, you know, as long as they include some net neutrality commitments, or something.  It was almost as if Senator Leahy was listening to Comcast's radio commercial as he spoke.  So, yeah, that pretty much set the tone.

The only Senators that represented my consumer interests, i.e., unchaining broadband Internet customers from the pay-TV business model, were Sen.'s Blumenthal (D-CT), Franken (D-MN), and Lee (R-UT).  I've already explained that the real problem here is the accretion of power that cable-affiliated RSNs have over pay-TV/broadband competitors.  In other words, this merger will harm the ability of consumers to ever use broadband Internet access--from any broadband provider--as a substitute for subscription TV service. 

The rest of the Committee members were distracted--like toddlers chasing soap bubbles--by the agenda of net neutrality "concerns" that we've seen hyped and re-hyped by the press for the last 3 months.  The reason that these "distractions" consumed the attention they did is, some believe, a sign of Comcast's power to intimidate the "real" witnesses away.  

And, according to this report, Comcast's "casting" of the issues covered in the hearing could not have worked out better for them.  Unfortunately, if the only people who are going to speak up about this merger can't pass up a public platform for their "net neutrality/broadband is a utility" shtick--then Comcast really is in great shape.  

3 Reasons Why "Net Neutrality" Is Comcast's Best Friend

1. The only "managed service" Comcast needs is the one they already have.  I can't say it any simpler than that.  When Prof. Susan Crawford went off the handle a couple weeks ago, at the rumor that Apple might have requested a "managed service" from Comcast, she failed to understand that this is precisely what is needed if the Internet is ever going to become a content delivery rival to TV.  If Comcast made "TV quality content delivery" available to some third party, then it would be available--and that's the point.

If a "managed" video delivery service is not available for wholesale purchase by Apple, then it's not available to any competitor to Comcast's cable service.  The fact is that Comcast will be happy to "swear off" offering managed services, because that's just like telling them to shut the door behind them for all those new markets where they'll be the dominant broadband and subscription TV company. 

2. Internet interconnection is not a merger issue (either).  Senator's Klobuchar (D-MN) and Franken (D-MN) wasted a fair amount of their time and attention on this little canard.  In fact, I'd say this line of questions, more than any other, made David Cohen look like the most reasonable person in the room. 

In the media, this issue is hyped a lot by Stacey Higginbotham from GigaOm.  She loves this issue--writes about it constantly (see), even when Comcast isn't buying its rivals.  Not surprisingly, a few days before the hearing, she writes, "expect more questions about paid peering and the Comcast merger."  

The reason this line of inquiry helps Comcast avoid harder issues is that buying transit is a long-established, industry-wide practice, and would exist even if Comcast was a "common carrier." Neither the FCC nor the DoJ, is going to do anything to change this practice in a merger review.

3. Data Caps.  The essence of this complaint is that the heaviest users don't like the ISP's pricing structure.  This complaint, like the previous issue, is a quixotic attempt to establish price regulation on ISPs. 

The "data caps" issue is only an issue for the highest use consumers--who want the lower use consumers to subsidize their consumption.  These people share the Reed Hastings view of net neutrality--averaging out the restaurant bill is fair, especially if you're the only guy drinking $100 champagne. 

At the hearing, TWC said they deal with this issue in an interesting way: they don't impose caps, but if a customer agrees to not exceed a certain amount of data downloads (and be subject to throttling, if they go over), the consumer gets $5 off their monthly bill.  My guess is that Comcast will have no problem offering this one up. 

Prognosis

Look, the net neutrality people aren't the "bad guys" here.  But, if a significant part of the merger opposition is ceded to the usual suspects--the same folks that seem intent on recycling their same net neutrality arguments, no matter the forum--then that's a shame. 

This merger squarely presents the DoJ and the FCC with a very fundamental "crossroads" choice--the future of competition for the broadband Internet versus the cable TV business model.  The public interest cannot settle for a bunch of buttercup-and-whipped-cream "commitments" to net neutrality.  The consequences are too high. 

I wanted to end on a cheerful note, so I'll leave it at this.  Remember, kids, while advocacy from 2005 ages poorly, this still-super fly Chamillionaire video never will.  Enjoy!
 

Maybe, I'll send some "Chamillitary" gear over to Prof.'s Crawford/Wu, and Free Press.  So, you know, at least the crew can be dressed in the "era-appropriate" pop fashion when they hit the NPR circuit.

April 8, 2014 3:06 PM

The Comcast-Time Warner Cable Merger and TV Quality Broadband Deployment

In Comcast's public positioning of its proposed acquisition of Time Warner Cable, executives of both companies have chosen to characterize the merger more by what it's not than by what it is.  So, we know that the merger is not going to result in any significant efficiencies, because it's not going to reduce consumer prices for cable (even an unconstrained monopoly reduces prices when costs decline).

We also know that the merger is not between two competitors, because--as the companies make it a point to tell us--they don't compete.  TWC's CEO says, "[w]hether you're talking about broadband or video, we don't compete with one another."  Comcast's CFO goes as far to state, "[w]e don't compete in one single zip code."  

Doesn't it kind of seem like they're trying just a little too hard to sell the notion that the combined service territory of Comcast and TWC is not relevant (because, you know, they don't compete)?

Product Market Definition

The last time the DoJ's Antitrust Division ("Government" or "DoJ") looked at a Comcast acquisition, it determined--based on documents from Comcast--that Comcast's "joint venture" (as it was structured at the time) with NBC-Universal would reduce competition in the "video programming distribution" market. See Comp. Impact Stmt. (CES).  The Government seemed especially concerned at the ability of post-merger Comcast to destroy nascent competition from online video distributors. CES at C and D.

Based upon the Government's concerns in the previous Comcast acquisition, and DoJ's focus on cross-elasticity of demand in defining a relevant product market, let's focus on some recent information from the Leichtman Research Group to get some valuable insights into how the Government might define a relevant product market.

Consider that, among multi-channel video providers, cable companies lost 1.7 million customers in 2013.  But, AT&T and Verizon added 1.5 million MPVD subscribers last year.  The Leichtman numbers show that customers are not so much "cutting the cord" (only 105k customers stopped buying from an MPVD in 2013) as they are switching MVPDs--but customers are choosing MVPDs that are also broadband providers.  Very high percentages (according to AT&T, well over 90%) of both cable and telco MPVD subscribers are also broadband customers.  The Leichtman data confirm this for Comcast and TWC, as well.

Purchasing video service from another broadband provider, allows the customer to purchase services they want from the MPVD, but also purchase services directly from an online vendor, like Netflix.   In its earlier analysis of the significant competitive effect of online video distributors, the Government referred to this practice as "cord-shaving." CES, at C.2(b).

Given consumer behavior, it seems likely that the Government will focus on a broadband market--of a sufficient speed to facilitate a competitive MPVD service--as the primary relevant product market.  Because it is this market in which the traditional "hypothetical monopolist" test would yield the greatest supply substitution responses.  For all practical purposes, we should consider broadband providers offering service at 10-15Mbps as participants in the "MVPD-bandwidth" market.

Geographic Market Definition

If one's primary concern was to look at the area over which the post-merger firm might be able to reduce competition, then that territory would be (at least) the total number of MVPD-bandwidth broadband customers in each geographic market served by Comcast or Time Warner Cable.  Within this total subset of homes passed will also include the majority of the customers capable of being served by AT&T and Verizon.

What is difficult to figure out from publicly available data is what percentage of MVPD-bandwidth homes will be served within that area by Comcast, Time Warner Cable, AT&T, and Verizon.  For our purposes, just to get a ballpark idea of the type of numbers we would be looking at, we are going to use a datapoint from the Leichtman 1Q 2014 Research Notes that the number of FiOS and U-Verse addressable homes stands at 41 million, giving the companies a video market penetration rate of 26%.  

Let's further assume--and this is a generous assumption toward Comcast--that AT&T and Verizon compete with Comcast and TWC in 70% of their combined service territory, but that all of AT&T and Verizon's customers were won in this territory.  This would give us a total denominator of about 59 million homes passed (that could receive MVPD quality broadband).

Market Shares

To get useful MPVD-broadband numbers, we are going to work with the Leichtman numbers we used earlier, but, because it is impossible to tell from the telco broadband numbers how many AT&T and Verizon broadband customers are actually U-verse and FiOS customers, we are going to use MPVD customers as a proxy, in order to allow us to get some ballpark market share numbers.

merger table_smaller.pngSo, we can see that the result of this merger, for anyone that has to depend on getting content, carriage, or online video distribution to these 60 million households will be looking at a market that goes from "moderately concentrated" to "highly concentrated" under the DoJ Horizontal Merger Guidelines at Section 5.3.

Competitive Effects

The competitive effects on both MPVD rivals like AT&T, RCN, and Verizon, as well as online video distributors like Netflix, are likely to be significant in terms of their ability to get competitive programming.  Add to this the fact that Comcast will also control 12 major regional sports networks, and it is easy to see how the post-merger firm could restrict output of the most inelastic, and  "linear," of linear programming to broadband and online video competitors.

Comcast RSN Map w caption.pngThis last effect is, potentially, disastrous for the future deployment of more MVPD-bandwidth broadband in the area that would be served by the combined Comcast-TWC, because it eliminates what is potentially the biggest source of pent-up consumer demand for MVPD-quality broadband as a substitute for traditional MVPD bundled service--online access to regional sports programming.  

How do we know the significance of real-time sports programming to the value of the broadband Internet?  Because the first truly linear, all HD, over-the-top channel--the WWE Network--has attracted almost 700,000 customers paying $10/month, in only 6 weeks

If the DoJ and the FCC value the availability of MVPD-bandwidth broadband throughout the Comcast-TWC territory, then Comcast might have a reason to worry.  But, commenters on the political left and right have conceded Comcast's powerful influence over the government; so, Comcast probably does have a decent chance of moving forward with this acquisition.  Unfortunately, it just postpones the day when consumers can choose to buy only the video content they want from the vendors they want.